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6 Business Acumen Concepts Managers Should Know

You’ve heard the expressions before, “Cash is king” and “Cash is the lifeblood of a company.” Sounds sensible, but what does it really mean? If cash is king, what about profitability?

Operating managers have a direct impact on both cash flow and profitability. They make day-to-day decisions that can greatly impact both. Yet, despite expertise in their respective fields, many managers don’t understand the difference between profitability and cash flow or how their decisions impact either.

6 Business Acumen Concepts Managers Should Know

The Income Statement is a non-cash indication of company performance. It reflects revenues for a specific reporting period and the expenses associated with that revenue.

Revenue is not the same thing as cash. It is a commitment by a customer to pay for goods and services.

Some expenses on the Income Statement are considered “non-cash” items because they reflect past and future cash expenditures. Depreciation and taxes payable are examples.

A company can have strong profits, but if it can’t generate sufficient sales and convert that revenue into collections, it won’t have cash. So, why is cash king? Because a company doesn’t pay its bills with revenue. It pays its bills with cash.

The Cash Flow Statement helps explain where a company’s cash comes from and how it’s used. The most important source of a company’s cash is collections from customers. It’s the primary source of what’s known as operating cash flow.

While cash is king, profitability is still very important. Because net profit reflects bad debt, it’s assumed that net profit will ultimately convert into cash. It’s just a matter of when it becomes cash. Improving net profit is an important lever to increase cash flow.

Operating managers have a direct impact on both cash flow and profitability. Helping them understand their critical role in contributing to positive cash flow and driving profitability enables and empowers better decision making.

Ned Wasniewski is a partner with Insight Experience, a Boston-based firm delivering contextually rich, immersive business simulations and learning experiences to accelerate and integrate leadership, business acumen and strategy execution.